The pros and cons of the new tax reform law

The Tax Reform for Acceleration and Inclusion (TRAIN) or the Comprehensive Tax Reform Program (CTRP) aims to create “a more just, simple, and more effective system of tax collection, as per the constitution, where the rich will have bigger contribution and the poor will benefit more from the government’s programs and services.”

The law’s key feature – and perhaps its most endorsed selling point – is lowering the personal income tax (PIT) for 99% of tax payers, increasing the take-home pay. For instance, an employee who earns P15,000 monthly gets a tax cut of P1,541. 83. Under TRAIN, there will be zero tax deductions. This is considered good news, especially for minimum wage earners and anyone who earns an annual taxable income below P250,000. The payslip can finally reflect the month’s worth of hard work and stressful commutes.

The new tax structure is also set to free many workers from what the finance department calls as the “artificial minimum wage trap,” wherein going a peso above the minimum wage will result in a lower effective take home pay discouraging earners to accept wage increases.

The rest of taxpayers, except the richest, will see lower tax rates from 30% to15% by 2023. Top individual tax payers earning more than P8 million annually will face a tax increase from the current 32% to 35%.

The Personal Income Tax Schedules show a gradual reduction of income taxes from 2018 to 2023. Photo from www.dof.gov.ph

TRAIN is part of the current administration’s grand plan of inclusive growth and poverty eradication but the resources needed to achieve this cannot be met through the current tax system, where collections have been below target due to inefficiencies. The tax reform is also critical in funding and improving much-needed public infrastructure projects, as well as health, education, and social-protection programs to ensure that there will be healthier, better educated, and more prosperous Filipinos by 2022.

While there’s a bigger amount going into your payroll ATM account, you might have to shell out more for living expenses. Here’s the catch with TRAIN: it will impose higher tax rates – and eventually, higher prices – on fuel, cars, tobacco and sugary beverages. Fuel price hikes, in particular, as we have seen repeatedly in the past, create a merciless domino effect of inflation. The cost of consumer goods — from transportation fares to food items — rise.

Reports are now surfacing that the jeepney minimum fare may reach P12, which is 50% higher than the current base fare. Let’s say a student rides the jeepney to and from work (five days) at the minimum fare, he or she would be spending P280 in a month. Once a ride costs P12, however, (assuming that the discounted fare is at P10) the transportation allowance needs P120 more. That student’s parents should also be working to benefit from the reform’s tax exemptions of up to P500,000, otherwise, the cost becomes a burden. This simple scenario shows that even if take-home pays are bigger, the supposed tax exemption will most likely fund additional expenses.

Lowering PIT rates, along with providing fixed rates for the estate and donor’s tax will cause a revenue loss of P140 billion, according to the Department of Finance. The VAT base expansion, petroleum, and automobile excise taxes, however, will result in revenue gains of almost P190 billion. This means the net gain is more or less P50 billion, excluding excise tax on sugar-sweetened beverages. While it is true that sugar-sweetened beverages such as soft drinks, energy drinks, and packed sweetened juices have health consequences, these are the refreshments of ordinary workers who cannot afford 100-percent-natural fruit juices. The tax and price hike are also expected to reduce sari-sari store owners’ income by 30-40%.

If funding socioeconomic programs are one major goal apart from increasing take-home pays, why are other means of revenue generation not tapped? The previous administration’s public-private partnership (PPP) program have built public infrastructures at zero cost for the government. The president’s “good friends” have also promised development assistance in his “Build, Build, Build” program.

The vision behind TRAIN is promising. It’s almost too good to be true, especially when an employee is allowed to take home his or her full share of hard work. The important question that every tax payer should be seeking an answer for: “Will the pros outweigh the cons?” and “Is TRAIN really a tax reform or a mere revenue generation measure?

Featured image by Madel Crudo

To know more about the Comprehensive Tax Reform Program (CTRP) or the Tax Reform for Acceleration and Inclusion (TRAIN), visit www.dof.gov.ph.